Brian Gaynor: Takeover fever targets resource companies

Takeover fever has hit the NZX after a quiet period since the beginning of last year. Three bids are in progress - for Pyne Gould Corporation, Comvita and Turners & Growers - after only seven offers between January 2010 and last month. Two of these were for NZ Farming Systems Uruguay.

Only three of these earlier bids led to full control and NZX delisting, and it is highly unlikely that the bidders for Pyne Gould, Comvita or Turners & Growers will achieve full control at current bid prices.

There are several characteristics associated with the takeover offers since the beginning of last year:

Most of the target companies have food, agriculture or land ownership activities. The notable exceptions are Tourism Holdings and Pyne Gould although the latter has a shareholding in PGG Wrightson.

Seven of the 10 offers have been made by overseas interests. The exceptions are Affco, Oyster Bay Marlborough Vineyards and Pyne Gould, although the offerer for Pyne Gould is 20 per cent overseas owned.

Three of the earlier target companies that have remained listed. Tourism Holdings, PGG Wrightson and NZ Farming Systems Uruguay, are trading on the NZX at or below their offer price.

In April last year, John Grace, who already owned 19.1 per cent of Tourism Holdings (THL), made a 67.5c a share offer to acquire 50.01 per cent of the rental campervan group's shares.

This compared with a 2007 offer at $2.80 a share from MFS Living and Leisure Group which did not receive sufficient responses to meet its minimum acceptance conditions.

The 2007 independent report valued THL at $2.53 to $3.38 a share whereas this year's valuation concluded the company was worth between 97c and $1.27 a share.

Grace did not gain sufficient acceptances to reach his 50.01 per cent target and the bid was withdrawn.

THL was broadly in line with its 2011 profit forecast of a small loss, when impairment of goodwill is excluded, and its recently released annual report stated that the board believes it can achieve the 2012 year net profit forecast of $5.9 million included in last year's independent report.

Nevertheless, THL's share price is still trading at 60c, a 46 per cent discount on the 2010 mid-point valuation of $1.12.

This demonstrates that valuations are subjective and it is unlikely that share prices will trade near these valuations if an offer is unsuccessful and the company remains listed.

The offers for Affco, Oyster Bay Marlborough and Charlie's - from Talley's, Delegat's and Asahi respectively - were successful because the offer price was within the valuation range and directors fully or partially recommended the bid.

Oyster Bay shareholders had the option of taking $2.08 cash or one Delegat's share, worth $1.80 at the time, for every Oyster Bay share.

In July last year, Olam made a 55c-a-share offer - subsequently lifted to 70c - for NZ Farming Systems Uruguay. The Singaporean company reached 78 per cent.

Nine months later, Olam made another offer at 70c but reached only 85.3 per cent even though NZ Farming Systems Uruguay's mid-point valuation had fallen from 72c to 64.5c a share.

Agria made a partial offer for PGG Wrightson at 60c a share and was swamped with acceptances. In line with its offer Agria had to scale back acceptances and ended up with 50.01 per cent.

The rural services group's share price is now trading well below Agria's offer price and the independent valuation range of 53c to 65c a share.

On October 10, Pyne Gould Corporation (PGC) was notified that Australian Equity Partners Fund No. 1 LP, owned 80 per cent by George Kerr and 20 per cent by US fund manager Baker Street, was intending to make a takeover offer at 33c a share.

This compared with PGC's net tangible assets of 61c a share at the end of June.

Chairman Bryan Mogridge and fellow independent director Bruce Irvine were criticised for not taking a more aggressive stance against the low-priced offer.

Kerr raised the offer to 37c a share on Thursday and 85 minutes later PGC issued its target company statement, which included the independent adviser's report. This determined that the company was worth between $108.1 million and $125.7 million or 49c to 57c a share.

This valuation is based on orderly realisation of the company's assets.

Accompanying this was a letter from the independent directors saying they would not be selling their shares at 33c.

The letter also said: "If you are a shareholder who has an appetite for long-term growth and does not require a dividend or immediate liquidity, and believe (Kerr and Baker Street) will bring adding strategies to PGC, then you SHOULD NOT SELL".

The question is: Did Kerr have a preview of the independent report and, if so, why did he try to game the independent directors by raising his offer from 33c to 37c just before the directors released their assessment of the 33c a share offer?

The independent directors will now assess the 37c offer but are unlikely to recommend acceptance unless it is much closer to the 49c to 57c valuation range.

PGC shareholders may remember the Tourism Holdings offer and decide that independent valuations are theoretical as far as the day-to-day share price is concerned.

However, the flip side to this is that George Kerr is much more likely than the directors of the rental campervan company to drive a share price up to its independent valuation level.

The $2.50 a share offer by Singapore-based Cerebos for Comvita was immediately rejected by the chairman of the target company, Neil Craig.

Craig told shareholders to wait for the independent report and reminded them "that after many years of careful planning and business, product and market development, we are now in a position to reap the rewards due to our loyal shareholders".

It is great to see the chairman of a target company take such a strong stance because a large number of resource-based companies, particularly in forestry and wine, have been gobbled up by foreign interests in recent years.

We are now exporting forestry in log form and more and more wine in bulk with most of the added value at production, distribution and ownership levels accruing to overseas interests. We don't want the manuka honey industry ending up in the same situation.

Guinness Peat Group (GPG) has agreed to sell its 63.46 per cent stake in Turners & Growers to German group BayWa Aktiengesellschaft for $1.85 a share, and under the Takeovers Code, BayWa is required to bid for 100 per cent.

Turners & Growers is expected to remain listed because the $1.85 a share is well below the company's net tangible assets of $2.47 a share and most minority shareholders are expected to reject the offer because BayWa should have a much more positive influence than GPG on the NZX listed company.

Disclosure of interest; Brian Gaynor is an executive director of Milford Asset Management, which holds shares in THL, PGG Wrightson and Comvita on behalf of clients.